Form 1040NR enters the 21st century

Although U.S. citizens and residents have long been able to submit their tax returns electronically, nonresidents have been stuck in the Dark Ages by having to file their tax returns by mail. At long last, a new era has arrived. Nonresident filers have entered the digital age, and they can now file their 2016 Form 1040NR, U.S. Nonresident Alien Income Tax Return, electronically. This announcement was made in the “What’s New” section of the 2016 Form 1040NR instructions.

However, according to the IRS website article “Modernized e-file (MeF) Overview,” the 2016 Form 1040NR-EZ curiously must still be paper filed. Further evidence of this somewhat surprising limitation is seen in the 2016 Form 1040NR-EZ instructions where the topic of electronic filing is conspicuously missing from the “What’s New” section. (A software vendor told us that the 2016 Form 1040NR-EZ can be e-filed and that these returns have been accepted by the IRS; however, without an official statement from the IRS, we have decided to focus exclusively on the 2016 Form 1040NR).

Brief history of e-filing of income tax returns

E-filing was started by the IRS much earlier than many practitioners might remember. Fact Sheet 2011-10 provides the history of e-filing, which began in 1986. Initially, e-filing was a pilot program in which five tax preparers who volunteered to participate e-filed 25,000 tax returns. In the beginning, the program required the tax preparer to call an IRS number where an IRS employee would connect the phone to a special modem with a tape drive called a Mitron. When the transmission was complete, the tape would be transferred to a minicomputer where the data was readied for IRS processing.

The IRS continued to expand the pilot program until 1990 when e-filing was made available nationwide. In that year, 4.2 million tax returns were e-filed. Since the rollout, the number and percentage of e-filed returns have steadily increased over the years. According to IRS Publication 6186, Calendar Year Return Projections for the United States and IRS Campuses 2016–2023, 128 million individual returns were electronically filed in 2015, 86% of all individual returns.

Much of the progress seen today with e-filing can be traced back to the 1997 congressional report, A Vision for a New IRS, prepared by the National Commission on Restructuring the IRS. The report sought to improve taxpayer service and transform the IRS into an agency that was “fair, efficient, and friendly.” One of the stated goals was to increase the reliance on e-filing to reduce the error rate associated with the manual data entry of paper returns.

Shortly after the release of A Vision for a New IRS, Congress passed the Internal Revenue Service Restructuring and Reform Act (RRA) of 1998, P.L. 105-206. Besides strengthening the Taxpayer Advocate Service, the RRA set a goal to have 80% of all returns filed electronically by 2007. Furthermore, the RRA added Sec. 6011(f) to authorize the IRS to “promote the benefits of and encourage the use of” e-filing. The RRA also required the IRS to report to Congress annually on its progress toward meeting the 80% e-filing goal. The first report (IRS Publication 3415) was released on June 30, 1999, and it showed that 23% of returns (29 million out of 125 million) were e-filed. Although the 80% goal was not met by 2007, the IRS has inched closer and closer each year. In the 2016 version of Publication 3415, the IRS reported a 77% e-filing rate for all major return types filed in 2015 (150 out of 193 million returns), including an 86% rate for individual returns.  

Another initiative that has contributed to the increased e-filing percentage was the passage of the Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92. This act requires paid preparers to e-file if the number of returns they prepare exceeds a certain amount. The mandate was phased in over time, with a threshold of 100 returns for 2011 and 11 returns for 2012 and beyond.

Over the years, various tax forms have been added to the e-file list. After beginning with the Form 1040, U.S. Individual Income Tax Return, in 1986, the IRS authorized Form 1065, U.S. Return of Partnership Income, and Form 1041, U.S. Income Tax Return for Estates and Trusts, to be e-filed in 1988. With the introduction of Modernized e-file (MeF) in 2004, the IRS began accepting e-filed Forms 1120, U.S. Corporation Income Tax Return, 1120S, U.S. Income Tax Return for an S Corporation, and 990, Return of Organization Exempt From Income Tax. The web-based MeF system enabled taxpayers to e-file their tax returns through the internet. Currently, MeF allows taxpayers to e-file the current-year tax return along with the two prior-year returns. However, for the Form 1040NR, only the current-year (2016) tax return can be e-filed.

The forgotten Form 1040NR

Despite the efforts of Congress and the IRS to increase the number and percentage of e-filed returns, the Form 1040NR has been ignored in this initiative until now. The reasons for the Form 1040NR’s longtime exclusion from e-filing may only be known to the IRS. However, one can surmise that the numbers may have been the cause of the omission. According to Publication 6186, fewer than 700,000 nonresident returns (Forms 1040NR and 1040NR-EZ, and Form 1040-C, U.S. Departing Alien Income Tax Return) were filed in 2015 (compared with 128 million for the Form 1040 series). With so few filings, the Form 1040NR was probably not high on the priority list. 

Form 1040NR due date

For nonresident employees who receive wages subject to U.S. withholding, Regs. Sec. 1.6072-1(c) provides that the due date for filing Form 1040NR (and Form 1040NR-EZ) is three-and-a-half months after year end (generally April 15 for calendar-year filers). However, if the nonresident did not earn wages subject to U.S. withholding and is otherwise required to file, the due date for filing Form 1040NR (and Form 1040NR-EZ) is five-and-a-half months after year end (generally June 15 for calendar-year filers). Just like U.S. citizens and residents, nonresidents can request an automatic six-month extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (which can be e-filed). 

Benefits of e-filing

In IRS Publication 3112, IRS e-file Application and Participation, the IRS explains some of the advantages of e-filing. In addition to saving money on the costs of printing and mailing forms, taxpayers benefit from fewer errors and faster processing times for e-filed returns. Transmissions are encrypted for security purposes, and acknowledgments of IRS receipt are typically received within 24 hours.

According to Fact Sheet 2011-10, the error rate for e-filed returns is only 1% versus 20% for paper returns. Moreover, refunds are generally received within 21 days (sooner in many cases) when e-filing is combined with direct deposit. On the other hand, refunds for paper-filed returns may take many weeks to receive. For balances due, taxpayers can pay with electronic funds transfer or credit card (for a fee). After reviewing some of the benefits, the message to nonresidents and their tax advisers is clear: Try e-filing!

Seth Colwell is a lecturer and Jessica Diaz is a graduate assistant, both in the school of accountancy at the University of Texas Rio Grande Valley, in Brownsville, Tex.